After float euphoria, iSelect price will be under scrutiny

The successful float of healthcare services group Virtus has created great anticipation for the next cab off the IPO rank - insurance comparison group iSelect.

The successful float of healthcare services group Virtus has created great anticipation for the next cab off the IPO rank - insurance comparison group iSelect.

As with Virtus, the demand for the iSelect float has been strong, indicating the listing will be a success. Once the euphoria of the float dissipates, though, it will be difficult to justify the price of the company.

iSelect has spent about $120 million building the most comprehensive health insurance comparison website in Australia. In recent times the group has branched out into other areas of insurance, but health still commands the lion's share of revenue.

The group receives upfront and trail fees from the online sales it makes on behalf of the product provider.

Management has done a sterling job of capturing 20 per cent of the health market without involving the two biggest players, BUPA and Medibank.

There are two big concerns with iSelect. Firstly, it brings forward its trail revenue by giving it a net present value. In other words, it books in this year's profit money that it will collect in future years. This has the impact of the

earnings dwarfing the cash flow, and we should always be careful of this model.

If the trail revenues were booked as revenue on receipt rather than upfront, iSelect would post earnings before interest, tax, depreciation and amortisation (EBITDA) of about $6 million this year instead of the forecast $24 million.

The second concern is the price being asked for the growth being achieved. The main shareholder, Nine Entertainment, is selling its stake in the company for 34 times 2013 earnings per share (EPS).

The 2013 EPS number has been knocked around by regulatory changes that late last year prompted many people to pay their premiums 12 months in advance to get a tax deduction.

In theory, normal growth should resume next year but it would be wise to sit this one out until we see more clarity as we move into the new financial year.

New Newscorp

Another new company to appear on the ASX this week was Rupert Murdoch's blandly named New Newscorp. The company is a product of a split by the old News Corporation.

The assets in NNC are a grab-bag of Murdoch's corporate history and include Australian and British newspapers, The Wall Street Journal, a 50 per cent share in Foxtel, Fox Sports, HarperCollins book publishing, a 61 per cent shareholding in online real estate outfit REA Group, a loss-making education division and about $2.5 billion in cash. The group will have little growth and, on the face of it, this is not an exciting asset.

Simply by valuing all the various assets and adding back the cash, NNC should have an enterprise value of about $10 billion, making it a sizeable Australian listed company. This means NNC should trade at about $17 a share.

On its first day of trading on Wednesday, though, the stock

was much lower at about $14.50. An opportunity to buy the

shares for Australian investors might occur in the first few weeks of trading.

It would be fair to assume that many of the international investors would have little interest in NNC and its Australian assets, preferring to own the much bigger North American-based 21st Century Fox, which contains all the movie and cable TV assets.

If the international investors dump NNC in the first two weeks of trading, it could provide an opportunity to buy the company at a discount to its considered valuation.

At this price the company is trading on a lofty price-to-earnings (P/E) multiple of about 28 times. However, on this occasion, because of accounting procedures, we should concentrate on the earnings before interest and tax (EBITDA) multiple under eight times.

The stock should not become totally friendless, though, with $500 million of the NNC cash earmarked for a buyback of stock.

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